TV executive believes the flat market’s here to stay

David Gyngell, CEO of Nine, is not overly optimistic about the chances of the free-to-air market improving after years of decline.
Photo: Louise Kennerley

by
Jake Mitchell

Exclusive
Nine Entertainment Co
chief executive
David Gyngell
has told fund managers he does not expect the free-to-air advertising market to improve materially after several years of decline, ahead of the company’s potential $3 billion float.

Investors that attended a series of briefings by Nine management last week told The Australian Financial Review Mr Gyngell was downbeat about the market’s growth prospects, warning there was no reason to believe the $3 billion metropolitan free-to-air-market would post meaningful growth over the next 12 months.

The total metropolitan FTA ad ­market declined by 2.6 per cent in fiscal year 2013, after falling by 4.7 per cent the previous year, according to the Commercial Economic Advisory Service of ­Australia.

The fund managers said Mr Gyngell was more optimistic about the prospects of earnings growth at the expense of rivals
Seven
and
Ten
as well as through regulatory reform such as the lowering or removal of license fees.

It is believed Nine recorded earnings before interest tax, depreciation and amortisation of $256 million in 2012-13.

The television, ticketing and digital group could be expected to post EBITDA of closer to $300 million in 2013-14 (on an annualised basis) once earnings from the Perth and Adelaide stations that Nine bought from regional broadcaster WIN Corporation this year are included.

“Since Nine was last listed, we have seen revenue fragmentation across the additional digital channels with some associated increase," Colonial First State head of Australian equities
Marcus Fanning
said. “They (Nine) have done a good job lifting ratings at the expense of Ten."

Ten’s profitability has been hit by poor ratings over the past two years. Seven West Media and Nine have enjoyed relatively strong earnings although all networks have been put under pressure by flat advertising ­markets.

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Structural challenges

Australian investors remain concerned about structural challenges facing commercial FTA networks as audiences and advertisers embrace online platforms. One fund manager, who declined to be named, questioned Mr Gyngell’s decision to proclaim in July that Australia may soon only sustain two healthy commercial free-to-air networks. “He’s basically saying the industry’s in trouble," the fund manger said.

However, Mr Gyngell’s comments could be part of lobbying efforts by the free-to-air industry. The networks are preparing to lobby the Abbott government for a cut to their $160 million broadcast licence fees as part of a package of measures to overhaul regulation of the industry. Another pressing regulatory issue is the potential abolition of the reach rule, which prohibits a TV licence holder from reaching more than 75 per cent of the national population, preventing commercial regional TV broadcasters from merging with metropolitan TV networks.

FTA networks also hope that legislation will be changed to allow them to charge for content that is retransmitted by Pay TV operators like Foxtel. Current rules prohibit a pay TV operator from disseminating another network’s content over the internet but allow it to happen via satellite or a “closed-signal" network.

Float details

Nine has given little detail to fund managers it has briefed in Sydney and Melbourne over the last two weeks, with the timing and size of the float yet to be defined. It is understood the float would aim to raise between $500 million and $1 billion, which would help repay shareholders and pay down debt.

Mr Fanning said he expected stock to be relatively easy to secure.

“The deal size should mean investors that want to play will be able to get a good allocation and if demand is strong, then the risk is you see the deal size increase," he said.

Nine hopes its shares will attract a higher price to earnings multiple than rival Seven West Media because it does not own any print assets after selling
ACP Magazines
to Germany’s
Bauer Media Group
for $500 million last year.

Seven owns print assets including The West Australian and Pacific Magazines.

Auscap Asset Management
principal
Tim Carleton
said there was a risk when well-known brands were floated that share prices were inflated.

“The major problem with big name floats is that because everyone knows them, they typically attract a price that’s north of fair value," he said.“Whenever people get a bit too excited about a particular stock or company because they know and recognise the brand, it tends to lead to a bit of a mispricing."

Retailer
Myer Group
listed in 2009 at $4.10 and the stock plunged to $3.88 on the first day of trade.